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Microcap & Penny Stocks : MTEI - Mountain Energy - No BASHING Allowed -- Ignore unavailable to you. Want to Upgrade?

To: eric deaver who wrote (4377)	7/1/1998 2:22:00 PM
From: Thomas C. White	Read Replies (2) \| Respond to of 11684

Hi Eric, "I just spoke w/ a mining engineer at Stagg to get a feel for cost of product sold. He indicated that for west virginia and using the mountian top removal mining technique, a cost of product sold along the line of $16-17/ton is reasonable. BTW, as I understand cost of procduct sold would include associated marketing and G&A in manufacturing accounting." I don't have any disagreement over the mine price (average price obtained for coal from mine), this also comes pretty close to the prices obtained by Arch for example. Where I would take issue is on calculation of COGS. $16 - $17 is probably a good figure for a "cost delta" -- that is, the additional direct variable cost incurred for extraction and transportation of an additional ton of coal. But I am willing to bet that it does not include equipment depreciation, which in the case of Arch and Zeigler calculations is included (basically, the components included in their calculations are direct mining costs including routine reclamation; depreciation; amortization of leases and other direct land costs; direct transportation; but not SG&A). In the extraction business, this has to be included in COGS, because it's a very capital intensive business. Basically, you probably need more or less around $.75 to $1 of net (depreciated) equipment for every $1 of coal sold per year (so, for example, if you are shipping $100 million of coal a year, you probably will end up having to have around net $75 - 100 million of plant and equipment). Also, from a purely anecdotal standpoint, I would note that this is a commodity business. If Zeigler and Arch could produce coal at COGS of $16 a ton instead of $22 - $23 a ton, realistically, they're probably smart enough to do so. Most of Arch's production is from Kentucky mines, which have very similar overall profiles to West Virginia. They're constantly shutting down mines and opening new ones to minimize COGS and maximize margins. You have a virtually unlimited supply of coal, and the location of good reserves have been delineated for years. If anybody with money and some good engineers could enter the business and make 30 - 40 percent margins, my contention is that everybody would be there, the supply would skyrocket, and the prices would fall through the floor until they reached a price just above where it was no longer worthwhile for anybody to do it. A number of the major oil companies (such as Arco) back years ago entered the coal business, and have been selling out because the business does not meet their target ROE (Arco is selling its coal operations to Arch for example). I'm not taking issue with MTEI's intent to pursue the coal business -- only with what could be some somewhat unrealistic expectations on things like gross margins. I'm not convinced that there are a lot of surprises left in the West Virginia coal business.